Shake Shack Inc. — Q3 2020 Form 10-Q
Reporting period: Thirteen weeks ended September 23, 2020; comparable quarter ended September 25, 2019. Year-to-date figures cover 39 weeks. Amounts below are in millions unless noted.
Business context and operating trends
Shake Shack operated and licensed 298 Shacks at quarter-end: 175 domestic company-operated, 22 domestic licensed and 101 international licensed. Eight company-operated and 18 licensed locations were temporarily closed, primarily due to COVID-19. The pandemic continued to affect dining, travel and urban locations.
Management reported sequential improvement in sales. Q3 same-Shack sales fell 31.7% year over year, compared with a 49.0% decline in Q2; urban Shacks declined 43% and suburban Shacks 16%. In fiscal October, same-Shack sales were down 21% overall. Digital sales represented 60% of Q3 Shack sales.
Financial results
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Total revenue | $130.4 | $157.8 | $365.4 | $443.1 |
| Operating income (loss) | $(6.8) | $8.2 | $(31.7) | $25.2 |
| Net income (loss) | $(6.1) | $11.4 | $(25.2) | $26.2 |
| Net income (loss) attributable to Shake Shack Inc. | $(5.6) | $10.3 | $(22.7) | $21.9 |
| Diluted EPS | $(0.15) | $0.31 | $(0.62) | $0.70 |
Q3 Shack sales were $126.3 million, down 17.1%; licensing revenue was $4.1 million, down 23.8%. GAAP operating margin was negative 5.2%, versus positive 5.2% a year earlier; net margin was negative 4.7%, versus positive 7.2%.
Shack-level operating profit, a company-defined non-GAAP measure, was $18.7 million (14.8% of Shack sales), down from $35.1 million (23.1%). Adjusted EBITDA was $8.2 million versus $23.3 million; adjusted EBITDA margin was 6.3% versus 14.8%. These non-GAAP measures exclude certain costs and should be considered alongside GAAP results.
Q3 food and paper costs were 30.0% of Shack sales, versus 29.0%; labor was 30.0%, versus 27.3%; other operating expenses were 14.8%, versus 12.4%; and occupancy was 10.4%, versus 8.2%. Higher packaging costs, sales deleverage and delivery commissions contributed to cost pressure. Labor included $2.1 million of incremental team-support costs in Q3.
Cash flow, liquidity and debt
For the first 39 weeks, operating cash flow was $28.5 million, down from $73.0 million. Investing activities used $27.3 million, including $47.0 million of property and equipment purchases; financing activities provided $136.6 million, largely reflecting $145.0 million in net proceeds from equity offerings. Cash increased to $174.9 million from $37.1 million at fiscal year-end 2019. Cash plus marketable securities was $191.8 million.
Current assets were $204.5 million and current liabilities $104.3 million. The company had no revolving-credit borrowings at quarter-end: it drew the facility’s full $50.0 million in March and repaid it in June. The facility matures in August 2024. An amendment requires minimum liquidity of $25.0 million through July 1, 2021; the company reported covenant compliance. Operating lease liabilities totaled approximately $371.0 million, in addition to finance lease liabilities.
Outlook, risks and unusual items
The company did not provide full fiscal 2020 financial guidance, citing substantial COVID-19 uncertainty. Management noted that recovery timing depends on the return of urban traffic, travel, offices, schools, gatherings and fully open dining rooms. It expected colder weather and rising COVID-19 cases to pressure near-term sales, while describing the operating environment as challenging and volatile.
Development expectations were 18–20 new company-operated Shacks for fiscal 2020 and 5–6 licensed openings in Q4, for 12–14 net licensed openings for the year. For fiscal 2021, management expected 35–40 company-operated and 15–20 licensed openings. These are forward-looking expectations, not guarantees.
Material risks include persistent pandemic-related restrictions and demand shifts, weaker urban and airport/stadium business, elevated food, packaging and delivery costs, and uncertainty in the timing of recovery. The company said there were no material changes to previously disclosed risk factors. A California labor matter was agreed to be settled for $1.2 million; $1.18 million was accrued. The company also reported $228.2 million of Tax Receivable Agreement obligations, with payments contingent in part on realizing the associated tax benefits and generating sufficient taxable income. A $1.1 million asset impairment was recorded in Q1 2020.
Important facts for investors to verify
- Whether same-Shack sales recovery continued after fiscal October, particularly in urban, Manhattan and travel-dependent locations.
- Whether sales improvement translates into restored operating margins as labor, packaging, delivery and occupancy costs evolve.
- Actual cash burn, capital spending and liquidity needs relative to the $25.0 million minimum-liquidity covenant and planned Shack openings.
- The pace and cash-flow impact of lease obligations and Tax Receivable Agreement payments.
- Progress against management’s fiscal 2020 and fiscal 2021 opening expectations, and any subsequent changes to outlook.
- The extent of dilution from equity offerings: 3.65 million Class A shares were issued in 2020 offerings, generating about $145.0 million net.